The Problem Of Working Capital Management


3)Working Capital
: Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations. The concept of this decision focuses on if it is possible to maintain enough capital for payments of its bills including and extra money earned as interest. Current assets and current liabilities are considered as the part of this decision.

An increase in revenue on a firm’s working capital can be a result of good management of a corporation’s strategic plan for measuring its assets and liabilities. Working capital represents a portion of a company’s investments that is used in the everyday business activities. For example managing the current assets represents about a 1/3 of the activities of the company and managing its liabilities represents ¼ of the companies’ activities. If Management adequately balances these two major components of the balance sheet this will balance the profits and reduce risks a company takes and all of this affects the

Capital budgeting is a long-term schedule that decides what investment projects to choose. When an option is selected, a company decides where and how to obtain the funds to support its investment and a way of determining the capital structure. A company should make sure it has access to working capital to maintain it operations daily. If this is not available, the company will not be able to maintain it daily operation until

McLaughlin (2009) states that the example organizations balance sheet (p. 125) does not show adequate cash assets (line 45), given a supposed annual budget of $3.5 million dollars, to provide adequate daily cash flow needs (p. 124). With year-end cash assets of only $16,190, working down the list of liquidable assets—using McLaughlin’s ‘water’ metaphor—savings and short term cash investments, A/R, and (in the case of for profit industry) inventories for sale, the companies working capital could be substantially increased providing more cash reserves.

Lawrence Sports is a manufacturer of sporting goods facing a fiscal dilemma in the early spring of 2011. Between the months of March and April, the company would experience an impasse within the context of its Current Cash Conversion Cycle. Here, an improved strategy for working capital management is called for.

Working capital is the excess of a company’s current assets over its current liabilities. Financially healthy firms have positive working capitals.

Improving working capital position, a company is able to compare from year to year any increase in revenue; increase in production due to a decrease in variable or fixed costs, increase in sales due to a new sales workforce and any increase in liabilities; new short term creditors, a higher accounts payable account due to the need to purchase new materials. A company can improve its working capital by trying to keep a healthy balance between the two accounts, cutting costs, and analyzing its current short-term debt in terms of how to decrease it or find alternative ways to avoid it such as restructuring production procedures. (Schroeder, el. 2014)

Many organizations make a financial goal to minimize the amount of cash on hand on a monthly basis. This goal is based on attempting to reduce the amount of non-earning assets for the company. Cash on hand that is not required to meet a specific need could be placed in an interest bearing account or used to pay down on a credit balance, also reducing the amount of interest a company would have to pay on a loan. “Minimizing cash balances as well as having accurate knowledge of when cash moves into and out of the company can improve overall corporate profitability.” (Block & Hirt, 2004, pg. 175).

4) Working Capital Management: It is especially around the management of cash, debtor, prepayments, stocks, creditors, short term loans, accruals, etc to make sure that enterprise maximizes the profitability of the enterprise. It is the management of the current asset and liability of the enterprise. The financial manager spends the most time in small scale enterprise is to ensure effective working capital and prevent insolvency and liquidity problem in the enterprise which could happen when current liabilities exceed current assets so the enterprise. The effective working capital management occurs when the main work to be done by the research work as it applies to small and medium scale enterprise.

I chose to research working capital because I did not know the term nor the significant role it plays in operating a business. I learned that working capital is the requirements for running normal business operations on a daily basis. It is the necessary amount needed to keep the doors open and is analyzed for a period of about a year. Working capital is essential for fulfilling business operating needs. Cash that is spent is not considered working capital because it can no longer be used by the company to invest. Working capital is the cash surplus within the company used to make more money. Implementing an effective working

Knowing the amount of cash that is available for a company at any given time isn't as simple as checking the bank balances that are available online. There are bills and other priorities that have to be paid out of it first. Otherwise, the company will be in serious financial trouble. But knowing what debts should be deducted from the cash that is available can get to be confusing because many of them can't realistically be paid off immediately. So the balance remaining would be a negative number. Luckily, there is a simple financial formula available, which makes the process easier. It is called the “net operating working capital calculation.”

The topic of the relationship between working capital management and the profitability has the attention of the financial researchers in the recent past years. As the working capital management has an effect on the profitability of a firm. To examine that relation, researchers have used many approaches and methodologies. Moreover, they have used different data samples depending on the country or the region that they wanted to study. In this paper, five of those researches are going to be reviewed.

What people are not aware of is that working capital management is in itself comparatively candid, in order to make certain that the company is competent enough to actually fund the difference between short-range assets & short-range liabilities. In reality, even so, working capital management has fairly become the weakness of scores of finance companies, with many CFOs efforts to recognize core/centre working capital drive forces and the suitable level or stage of working capital. Which is the reason; companies can be minimal in their capability to experience and survive unforeseen or unfavorable events and see to it, that the cash or money is readily on hand as it is necessary, in spite of the situation or circumstances. So, by comprehending the role and driving forces of working capital management and taking the necessary steps in order to reach the ‘correct’ levels of working capital, companies then can start to decrease their risk, effectually get ready for uncertain doubt and enhance general performance. Also, managing good working capital chiefly calls for managing and controlling the cash flows of a company on an everyday, weekly, and monthly activity, in this way, they will be fulfilling all debts, although, still reserving enough assets or capital to stay in operations and the creation of profits.

If it is constantly coming near say 30%, i.e. working capital level is 30% of sales, the next year estimation is done based on this estimate. If the expected sales are 5 crores, 1.5 crores would be required as working capital. The advantage of this method is that it is very simple to understand and calculate also. Disadvantage includes its assumption which is difficult to be true for many organizations.

Sometimes referred to as operating capital, it is a valuation of the amount of liquidity a business or organization has for the running and building of the business. Generally speaking, companies with higher amounts of working capital are better positioned for success. They have the liquid assets needed to expand their business operations as desired. Changes in working capital will impact a business’ cash flow. When working capital increases, the effect on cash flow is negative. This is often caused by the liquidation of inventory or the drawing of money from accounts that are due to be paid by the business. On the other hand, a decrease in working capital translates into less money to settle short-term debts.